Bestselling author Cass Sunstein in his short, albeit interesting work, attempts to amalgamate the process of regulation with the science of decision theory, with a view to arriving at solutions for improbable occurrences that leave decision makers totally unprepared, such as pandemics and climate change. Underpinning Sunstein’s overarching proposal, is the maximin principle which advocates selecting an approach that eliminates the worst of the worst-case scenarios. As Sunstein himself acknowledges, the maximin principle has come under fire from various economists for certain inadequacies. The Hungarian-American Nobel Prize winning economist, John Charles Harsanyi, derided this principle by arguing that it produced irrationality and even madness. “if you took the maximin principle seriously you could not ever cross the street (after all, you might be hit by a car); you could never drive over a bridge (after all, it might collapse); you could never get married (after all, it might end in a disaster), etc. If anybody really acted in this way, he would soon end up in a mental institution.”
Sunstein works around the limitations of the principal, and after making his assertions regarding the efficacy of the Maximin model with recourse to various hypothetical problem statements, encapsulates his solutions in the form of suggestions that almost seem reductionist in their simplicity and amenability for implementation. These suggestions, inter alia include:
- Outcomes that embed within genuinely catastrophic outcomes (potential) and such outcomes are not perceived to be highly improbable, the most optimal manner to maximize net benefits might be to eliminate such outcomes;
- In the face of “fat-tail” scenarios, the Maximin principal might be the most appropriate choice. This is because of the fact that the probability of extreme and catastrophic events does not decline sufficiently rapidly to compensate for risk aversion to encountering such catastrophic events; and
Even though under 200 pages, the book is packed with references to concepts that are complex in their sweep and arcane in their wake. Concepts such as Knightian Uncertainty (in its most macroscopic definition, an inability to assign probabilities to various outcomes); Precautionary Principle (a broad epistemological philosophy, used mostly in the field of environmental science that advocates a wait and watch approach before instituting radical innovations, that otherwise might lead to disaster); Principal of Insufficient Reason ( A concept first advocated by Jakob Bernoulli and which asserts that equal probabilities must be assigned to each of competing assertions if there is no positive reason for assigning them different probabilities); and Frequentism (a notion that defines an event’s probability as the limit of its relative frequency in many trials).
Sunstein liberally draws on the works of Robert S. Pindyck in many parts of the book to bolster his propositions regarding the applicability and utility of the Maximin principle. Pindyck, in tandem with Ian W.R. Martin had published a seminal paper titled “AVERTING CATASTROPHES:THE STRANGE ECONOMICS OF SCYLLA AND CHARYBDIS” for the National Bureau of Economic Research. The paper explored the policy interdependence of catastrophic events, and demonstrated that considering these events in isolation can lead to policies that are far from optimal. The authors, going beyond the tried and tested cost-benefit methodology, also formulated a few rules for determining the events that ought to be necessarily averted and events which need not be averted.
Lots of insightful examples highlighting the conundrum faced by the regulatory authorities in formulating catastrophe aversion policies, especially in the case of pandemics and climate change are set out by Sunstein. For example, on account of the raging COVID-19 pandemic, that is wreaking havoc across the world, “closing the schools is not exactly an engine of equal opportunity. And if costly regulation, driven by the maximin principle, is imposed on sources of risk (such as fossil fuels and motor vehicles), it might well impose disproportionate hardship on the poor.”
“Averting Catastrophe”, contains very unique and innovative insights on various aspects of decision making and the improbability of employing probability theory in a uniform and harmonized manner, the book seems to be crafted for a niche audience. The books seems to be for the particular consumption of Mathematicians and policy makers. A subject of such import and magnitude could have been simplified so that everybody irrespective of their chosen career profession conscientiously become “stakeholders” in an attempt to redress the grave grievance posed by events such as pandemics and climate change. That would have been a much needed “Nudge” (no pun intended).
(Averting Catastrophe: Decision Theory for COVID-19, Climate Change, and Potential Disasters of all Kinds will be released by New York University Press on the 20th of April 2021)